Pharmaceutical and Life Sciences Companies Face Rising Tax Rates, Says PricewaterhouseCoopers

Tax Issues to Play Bigger Role in Company Valuations and Business Strategy

NEW YORK, Dec. 1 /PRNewswire/ -- The global financial crisis, government pressure, changing market dynamics for an industry experiencing significant change, and rapidly evolving healthcare reforms are likely to drive up the effective tax rate for the pharmaceutical and life sciences industry, according to a report released today by PricewaterhouseCoopers entitled Pharma 2020: Taxing times ahead - Which path will you take? The industry's response to these trends, including diminishing reliance on the 'blockbuster drug model,' will make tax planning more complicated and challenging for tax executives working for pharmaceutical and life sciences companies.
 

In a poll of 35 senior tax executives from pharmaceutical, biotech and medical device companies conducted last month by PricewaterhouseCoopers:
 

  --  Six in ten tax leaders (62 percent of those polled) agreed that an
      increase in the effective tax rate for the pharmaceutical and life
      sciences industry is inevitable.
  --  Sixty-three percent of the poll participants agreed that the cost of
      increased taxes on their organizations might eventually be passed to
      consumers unless they find ways to operate more efficiently and
      transform their approach to R&D and sales & marketing.
  --  Sixty-two percent of tax executives polled said they are looking to
      maximize tax credits and other incentives for research and
      development.
  --  Virtually all executives polled (100 percent) said they believe that
      the demand for tax specialists will grow substantially as tax issues
      for the industry become more complex.
  --  More than half of the respondents said they are now being consulted
      early on by senior management in strategic business decisions, and
      thus have influence over the direction of the company. Still, 34
      percent said they are consulted late in the game, and 9 percent of tax
      leaders said they are informed after the fact about strategic business
      decisions that have tax implications for the organization.

"To continue to deliver value to shareholders and society, pharmaceutical and life sciences companies must make strategic decisions about how they will drive innovation and profitability, but as they do so, each company's top tax executive needs a prominent 'seat at the C suite table,'" said Michael Swanick, global pharmaceutical and life sciences tax leader, PricewaterhouseCoopers. "Tax planning will be a critical consideration, not an afterthought, of long-term business plans to grow, buy, merge or sell and it will be one of the most important considerations in deciding where to locate IP, manufacturing and service delivery."
 

Pharma 2020: Taxing times ahead - Which path will you take? is the fifth paper in the PricewaterhouseCoopers' Pharma 2020 series examining key forces reshaping the pharmaceutical marketplace. Focusing on the challenges and opportunities ahead from a tax perspective, the report identifies the following market forces making tax issues more complex.
 

Economic and Government Pressure: Crackdown on Tax Havens
 

The global recession has made tax authorities around the world hungry for new revenue sources to overcome growing budget deficits and potential new costs associated with healthcare reform initiatives. Governments are very concerned and are therefore focused on the use of "tax havens" that allow multinationals to move profits offshore. Governments will continue to scrutinize transfer pricing practices to limit abuse of intra-company transfers of expenses or profits. Economic substance of offshore operations will become increasingly more important.
 

According to PricewaterhouseCoopers, identification of uncooperative nations may become more common, and corporations that continue to use "tax havens" could face financial penalties and reputational damage.
 

Healthcare Market Trends: Focus on Outcomes and Personalized Medicine
 

Payers want better value for the money they spend on healthcare and are focusing their efforts on increasing delivery of successful treatments. In response, drug and device makers will begin shifting from a purely product-centric focus to a service model aimed at improved patient outcomes and prevention or cure, versus ongoing treatment, of disease. As such, with other participants they are packaging traditional products with holistic services including diagnostic, wellness and compliance monitoring. In addition, with the advancement of personalized medicine and tailored approaches to prevention and care, pharmaceutical companies are developing more complex and fragile specialized therapies, many of which need to be manufactured in closer proximity to patients.
 

By increasing service delivery and locating manufacturing closer to patients, or the end market, both the supply chain and intellectual property will be geographically dispersed. Pharmaceutical and life sciences companies not only could face new and higher taxes as a service provider, but they will have less ability to allocate profits to lower-tax rate locations. Furthermore, a decision to locate service providers in end markets could create permanent establishments in multiple tax jurisdictions, increasing the risk of double taxation disputes involving international or intra-company allocations around pricing, royalty rates, interest, management fees, business expense and gross revenue.
 

Complex Business Combinations
 

The need to fill the shrinking drug pipeline has fuelled a resurgence in mergers and acquisitions (M&A), in-licensing arrangements and formation of partnerships and joint ventures, a trend PricewaterhouseCoopers expects to continue. Each of these strategies comes with significant tax implications, depending on how a company accounts for acquisition-related items, structures royalty payments, and shares profits and losses among different legal entities and locations.
 

Competition to Attract Pharmaceutical and Life Science Investments
 

Pharmaceutical and life sciences companies are interested in locating intellectual property development in areas that offer economic and tax incentives and to expand their presence in emerging markets that promise growth potential. International competition is intensifying to attract new investment by pharmaceutical and life sciences companies, particularly from emerging markets, such as China. According to PricewaterhouseCoopers, this trend may further drive profit growth to the East, but companies will need to balance increased income with higher tax rates and potential price controls.
 

"To manage effective tax rates, pharmaceutical and life sciences companies will need to develop tax planning consistent with their new business models and carefully balance risk with opportunity," said Simon Friend, global pharmaceutical and life sciences leader at PricewaterhouseCoopers. "Tax will need to be involved sooner and up front, a trend we already are seeing throughout the industry."
 

In Pharma 2020: Taxing times ahead - Which path will you take? PricewaterhouseCoopers outlines approaches that companies are taking to respond to tax challenges and related implications for their organizations. A full copy of the report is available at www.pwc.com/pharma2020tax. The entire Pharma 2020 series can be found at www.pwc.com/pharma2020.
 

About PricewaterhouseCoopers Pharmaceutical and Life Sciences Industry Group
 

PricewaterhouseCoopers Pharmaceutical and Life Sciences Industry Group (www.pwc.com/pharma) provides clients with audit, tax and advisory services. The firm has extensive experience in delivering industry-tailored solutions on a wide range of strategic, financial and operational issues. The Pharmaceutical and Life Sciences Industry Group is part of PricewaterhouseCoopers' larger initiative for the health-related industries that brings together expertise and allows collaboration across all sectors in the health continuum.
 

About PricewaterhouseCoopers LLP
 

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
 

"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
 

© 2009 PricewaterhouseCoopers LLP, all rights reserved
 

Source: PricewaterhouseCoopers

CONTACT: Art Karacsony, PricewaterhouseCoopers LLP, +1-973-236-5640,
attila.karacsony@us.pwc.com, or Lisa Stearns, The Hubbell Group, Inc.,
+1-781-878-8882, lstearns@hubbellgroup.com
 

Web Site: http://www.www.pwc.com/
 

Posted: December 2009


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